Hedonic Price Indices In Rapidly Changing Markets: Studies Of Pricing In The Internet Service Provider And DVD Markets

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This dissertation considers price indices in the context of two rapidly growing markets. The first is the emerging market for Internet Service Providers in the mid-1990s. The second is the emergence and growth of the DVD hardware market. In both, we examine indices ranging from the most rudimentary to quality adjusted hedonic models. In the context of the ISPs, we also use this framework to study firm behavior and the development of industry structure. The results show decisively that ISP prices have been falling rapidly over time. The bulk of the price decline is in the early years of the sample, especially the period between early 1995 and spring of 1996, but a significant and steady decline continues throughout. We conclude that ignoring aspects of quality underestimates the price declines. It also alters the timing of the measured declines. The results also show that there are links between changes in market structure and ISP pricing. Entry lowered prices, and later entrants entered with differentially lower prices than earlier entrants. Both of these facts are consistent with positive sorting through entry. We also conclude that ignoring aspects of quality underestimate the price declines. It also alters the timing of the measured declines. In the DVD hardware market, this study shows that prices have been falling at a ~24% compounded annual rate since the product's introduction in the marketplace. This is significantly faster than the results garnered from elementary price indices or matched models methods with the same data sample. The paper shows that the hedonic framework is suitable for such rapidly growing and changing product markets. This paper demonstrates that it is the easily discernable high level features of DVD hardware that drive most of the variability in price. Brand also impacts price but the impact has less explanatory power than the high level features of the DVD hardware itself. The hedonic pricing results and the pricing indices created are extremely robust to various specifications. The results on qualitative measures of quality suggest that they are not significant determinants of the price in the hedonic model used here.

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  • 08/16/2018
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